Based on the international trend of transparency and disclosure procedures, Brazil recently enacted regulations to require information from the ultimate beneficial owner (UBO) on investments held in Brazilian financial and capital markets.
The background for this approach stems mainly from commitments assumed jointly with other countries and the involvement of Brazil in certain international initiatives. In this context, Brazil and the US have entered into a tax exchange information agreement and an agreement to improve international tax compliance (a FATCA agreement). Also, Brazil has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters for administrative cooperation between the contracting states in the assessment and collection of taxes and to mitigate tax avoidance and evasion; Brazil, as a member of the Financial Action Task Force (FATF), has sought to implement its recommendations.
Thus, Brazil has adopted procedures to regulate both the FATCA agreement and the convention, and also to comply with recommendations 24 and 25 of FATF and with the rules of the Common Reporting Standard (CRS). Furthermore, regarding anti-money laundering and combatting terrorist financing, several other measures have been implemented, creating ancillary and disclosure obligations for investors.
As the main Brazilian ancillary obligations and legal framework applicable to non-resident investors regarding UBO, consideration should be given to the procedures to obtain a tax ID number (CNPJ) and to FATCA disclosure obligations (E-Financeira), the identification of financial accounts in accordance with CRS, the regulation of investments in Brazilian financial and capital markets, and KYC requirements.
Regarding CNPJ regulation, the preliminary draft (publicised by the Brazilian Internal Revenue Service to make the text available to the general public for comment) explains that the introduction of the requirement for disclosure of the UBO resulted from several studies that took place in the forum of the National Strategy for Combating Corruption and Money Laundering, which is the main body for Brazil to discuss among the executive, legislative and judicial branches the issues related to combatting such crimes and determining the obligations and recommendations contained in the international agreements signed.
Tax authorities have started to inspect and question more intensively regarding UBOs for investments carried out in Brazil. Although the main target was initially private equity investment funds (FIP), the same approach applies to all sorts of investments carried out on Brazilian financial and capital markets and private companies. Mainly for FIP, in case of non-disclosure, the existing tax assessments have been imposed with a grossed-up 35% taxation over the total amount distributed to non-resident investors. The legal grounds for these sanctions are somewhat unclear at this stage.
There is uncertainty on how the disclosure should apply in a chain of ownership (no clear guidelines in the applicable regulation) and on how the tax authorities will react if the UBO’s information is provided and they disagree on the applicable tax treatment due to the nature and/or location of the investors.
In practical terms, it seems that the authorities want more information than investors want or are able to provide. Under this scenario, the worst outcome for the market is to create an uncertain, suspicious, and unstable environment. It is clear that transparency and disclosure are a one-way path and investors and financial sponsors must review how to structure investments and business so as to permit the easy flow of information. However, authorities must verify what is reasonable to consider and request in order to obtain the information without hampering global investments and imposing unnecessary procedures.
In this transitory moment, there is a learning process for all in order to achieve standard and defined procedures for information and disclosure of UBOs.
Andrea Bazzo Lauletta (andrea.bazzo@mattosfilho.com.br) is a partner at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados.
